Registration Nos. 333-45194
811-10115
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. -1- /X/
Post-Effective Amendment No. --- / /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. -1- /X/
(Check appropriate box or boxes)
AYCO SERIES TRUST
(Exact name of Registrant as specified in charter)
One Wall Street
Albany, New York 12205
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (518) 464-2000
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John Breyo
The Ayco Company, L.P.
One Wall Street
Albany, New York 12205
(Name and address of agent for service)
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Please send copies of all communications to:
Jane A. Kanter, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
PROSPECTUS
November 30, 2000
AYCO LARGE CAP GROWTH FUND I
A series of the
AYCO SERIES TRUST
The AYCO LARGE CAP GROWTH FUND I seeks long-term growth of capital.
Investment Manager
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THE AYCO COMPANY, L.P.
One Wall Street
Albany, New York 12205
1-800-235-3412
The Securities and Exchange Commission ("SEC") has not approved or disapproved
the securities being offered by this prospectus nor has it determined whether
this prospectus is accurate and complete. It is unlawful for anyone to make any
representation to the contrary.
THE FUND'S SHARES ARE CURRENTLY SOLD TO INSURANCE COMPANY SEPARATE ACCOUNTS IN
CONNECTION WITH VARIABLE ANNUITY CONTRACTS OR VARIABLE LIFE INSURANCE POLICIES
("CONTRACT" OR COLLECTIVELY, "CONTRACTS") ISSUED BY THOSE INSURANCE COMPANIES.
THIS PROSPECTUS IS DESIGNED TO HELP YOU MAKE AN INFORMED DECISION ABOUT ONE OF
THE FUNDS THAT IS AVAILABLE UNDER YOUR CONTRACT. YOU WILL FIND INFORMATION
ABOUT YOUR CONTRACT AND HOW IT WORKS IN THE ACCOMPANYING VARIABLE LIFE INSURANCE
OR VARIABLE ANNUITY PROSPECTUS.
TABLE OF CONTENTS
Page
THE FUND
Investment Objective
Principal Investment Strategies
Principal Risks Of Investing In The Fund
MANAGEMENT OF THE FUND
The Investment Manager
THE DISTRIBUTOR
OTHER IMPORTANT INVESTMENT INFORMATION
Purchase And Redemption Price
How Assets Are Valued
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Dividends, Distributions And Taxes
Financial Highlights
ADDITIONAL INFORMATION
THE FUND
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INVESTMENT OBJECTIVE
The Ayco Large Cap Growth Fund I ("Fund") seeks long-term growth of capital.
This objective is non-fundamental and may be changed without shareholder
approval.
PRINCIPAL INVESTMENT STRATEGIES
In seeking to achieve its objective, the Fund normally invests at least 65% of
total assets in common stocks of large capitalization companies that The Ayco
Company, L.P. ("Ayco" or "Manager"), the Fund's investment manager, believes
will provide superior long-term investment results. For these purposes, large
capitalization companies are those with market capitalizations of $5 billion or
more at the time of the Fund's investment.
The Manager uses an investment approach that combines a fundamental analysis of
individual companies with a top-down economic and market sector analysis. In
selecting investments for the Fund, the Manager first reviews economic trends in
order to identify economic sectors and companies that are expected to be
positively affected by those trends. The Manager then seeks to identify
securities of dominant companies with global franchises that have the following
characteristics:
O Earnings growth rates generally greater than that of the companies
within the Standard & Poor's 500 Composite Stock Price Index ("S&P
500");
O strong balance sheets;
O strong company fundamentals;
O free cash-flow generation; and
O experienced management.
The Manager may adjust the sector weightings of the Fund as it deems
appropriate.
The Manager expects to be fully invested, with minimal cash holdings. Normally,
the Fund expects to hold common stocks of between 40 and 70 companies. Up to
15% of its total assets may be invested in securities of foreign companies.
The Manager may sell a portfolio holding for one or more of the following
reasons:
O the issuer's long-term relative earnings potential has declined or it
is considered to be overvalued;
O the issuer has not met the Manager's earnings and/or growth
expectations;
O the issuer's characteristics have changed;
O political, economic, or other events no longer match the Manager's
original expectations when it decided to purchase the security; or
O the security has reached the Manager's price objective.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The Fund is designed for investors seeking capital appreciation over the long
term. There can be no assurance that the Fund will be successful in meeting its
objective.
The Fund invests mainly in equity securities of domestic and foreign companies
and, therefore, has exposure to the risks of such securities. A principal risk
of an investment in the Fund is that you may lose money on your investment.
Other principal risks include:
COMMON STOCKS
Investments in common stocks are particularly subject to the risk of changing
economic, stock market, industry, and company conditions that can adversely
affect the value of the Fund's portfolio holdings.
FOCUSED PORTFOLIO RISK
While the Fund is considered to be diversified for purposes of both the
Investment Company Act of 1940, as amended ("1940 Act"), and the Internal
Revenue Code of 1986 ("Internal Revenue Code"), the Fund expects to invest in
the securities of a relatively limited number of companies (i.e., between 40 and
70 companies). Consequently, the Fund may be subject to more risk than other
funds because changes in the value of a single security may have a more
significant effect, either positive or negative, on the Fund's net asset value.
SECTOR RISK
Market or economic factors affecting certain companies or industries in a
particular industry sector could have a major effect on the value of the Fund's
investments. For example, many technology stocks tend to be more volatile than
the overall market.
FOREIGN SECURITIES RISK
To the extent the Fund invests in foreign securities, the Fund is subject to
risks arising out of its investments in foreign securities. The Fund's
investments in foreign securities involve risks not associated with investing in
U.S. securities, which can adversely affect the Fund's performance. Foreign
markets, particularly emerging markets, may be less liquid, more volatile, and
subject to less government supervision than domestic markets. There may be
difficulties enforcing contractual obligations, and it may take more time for
trades to clear and settle. In addition, the value of foreign investments can
be adversely affected by: unfavorable currency exchange rates (relative to the
U.S. dollar for securities denominated in foreign currencies); inadequate or
inaccurate information about foreign companies; higher transaction, brokerage
and custody costs; expropriation or nationalization; adverse changes in foreign
economic and tax policies; and foreign government instability, war or other
adverse political or economic actions.
PERFORMANCE INFORMATION
THE FUND HAS NO HISTORICAL PERFORMANCE TO REPORT BECAUSE IT COMMENCED OPERATIONS
ON NOVEMBER 30, 2000.
MANAGEMENT OF THE FUND
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THE INVESTMENT MANAGER
Ayco, One Wall Street, Albany, New York 12205, serves as the Fund's Manager
through its Ayco Asset Management division. Ayco is registered as an investment
adviser with the SEC under the Investment Advisers Act of 1940, as amended. The
Manager has been providing investment advice since 1971. The Manager does not
currently serve as an investment manager to any other registered investment
company. However, executives and members of the investment advisory staff of
the Manager have extensive experience in other capacities in managing
investments for various clients, including trusts, corporations, foundations,
charitable organizations, retirement plans, and individuals, and as of March 30,
2000, had approximately $4.4 billion in assets under management.
The Fund is managed by Ayco Asset Management's investment committee. The
investment committee performs research and analysis in order to identify
potential investments for the Fund's. Peter H. Heerwagen is a leading member of
Ayco Asset Management investment committee and has the authority to veto
individual purchase and sale determinations made by the Manager's investment
committee. Mr. Heerwagen is responsible for the day to day oversight and
management of the Manager. Mr. Heerwagen has served as Ayco Asset Management's
Chief Investment Officer since 1986. Stephen H. Orr serves as chairman of Ayco
Asset Management's investment committee and, like Mr. Heerwagen, has the ability
to veto individual purchase and sale determinations made by the Manager's
investment committee. With respect to the Fund, Mr. Orr is responsible for the
day-to-day management of the Fund's portfolio holdings and investments. Mr. Orr
has served as Ayco Asset Management's Director of Portfolio Management since
1995.
PRIOR PERFORMANCE OF MANAGER
The chart below shows the historical performance of the Ayco Large Cap Growth
Composite ("Composite"). The Composite includes all actual, fee-paying, private
accounts managed by the Manager for a period of at least six months for which
the Manager has full discretion and that: (i) have investment objectives,
policies, strategies and risks substantially similar to those of the Fund; and
(ii) have a minimum of $100,000 in net assets. As of June 30, 2000, the
Composite included 245 equity accounts and assets of $172.4 million, which
represented 7% of total assets under management.
The performance shown below for the Composite is the historical performance
record of the Manager and is not intended to imply how the Fund has performed or
will perform. Total returns represent past performance of the Composite and not
the Fund.
The total returns for the Composite reflect the deduction of investment advisory
fees, brokerage commissions and execution costs paid by the Manager's private
accounts, without provision for federal or state income taxes. Custodial fees,
if any, were not included in the calculation. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The private accounts that are
included in the Composite are not subject to the same types of expenses to which
the Fund is subject or to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Portfolio by the 1940 Act
or Subchapter M or Subchapter L of the Internal Revenue Code. Consequently, the
performance results for the Composite could have been adversely affected if the
private accounts included in the Composite had been regulated as investment
companies under the federal securities laws.
The major difference between the SEC prescribed calculation of average annual
total returns for registered investment companies (or series thereof) and total
returns for Composite performance is that average annual total returns reflect
all fees and charges applicable to the registered investment company in question
and the total return calculation for the Composite reflects only those fees and
charges described in the paragraph directly above.
The performance results for the Composite presented below reflects the deduction
of somewhat lower fees and expenses than those of the Fund. The returns shown
below would have been lower had the fees and expenses of the Fund been
reflected. In addition, owners of Contracts whose account values are invested
in the Fund will be subject to charges and expenses relating to such Contracts.
The performance results presented below do not reflect any Contract related
expenses and would be reduced if such charges were reflected. The investment
results presented below are unaudited.
ANNUAL RATES OF RETURN OF COMPOSITE AS OF 06/30/00
Ayco Large
Year Cap
(ending Growth S&P 500
6/30/00) Composite1<F1> Index2<F2>
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1 Year 17.57 7.24
5 Year 26.87 23.80
since inception (6/30/93) 23.17 20.64
1<F1> THE COMPOSITE'S RETURNS ARE PRESENTED after giving effect to the
deduction of an advisory fee equal to 0.98% of net assets, the weighted
average advisory fee charged to accounts within the Composite.
2<F2> The S&P 500 is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the larger capitalization portion of the
United States stock market. The S&P 500 reflects the reinvestment of
income dividends and capital gain distributions, if any, but does not
reflect fees, brokerage commissions, or other expenses of investing.
THE MANAGER'S COMPENSATION. For its services, the Manager is entitled to a fee,
which is calculated daily and paid monthly, at an annual rate of 0.80% of the
Fund's average daily net assets.
EXPENSE LIMITATION AGREEMENT. In the interest of limiting expenses of the Fund,
the Manager has entered into an expense limitation agreement with the Trust
("Expense Limitation Agreement"), pursuant to which the Manager has agreed to
waive or limit its fees and to assume other expenses so that the total annual
operating expenses of the Fund (other than interest, taxes, brokerage
commissions, other expenditures which are capitalized in accordance with
generally accepted accounting principles, distribution related expenses (if
any), and other extraordinary expenses not incurred in the ordinary course of
the Fund's business) are limited to 1.00% of the average daily net assets of the
Fund for the fiscal year ending December 31, 2001. The Expense Limitation
Agreement shall continue from year to year provided such continuance is
specifically approved by a majority of the Trustees of the Trust who (i) are not
"interested persons" of the Trust or any other party to the Expense Limitation
Agreement, as defined in the 1940 Act, and (ii) have no direct or indirect
financial interest in the operation of the Expense Limitation Agreement.
The Fund may at a later date reimburse the Manager for the fees waived or
limited and other expenses assumed and paid by the Manager pursuant to the
Expense Limitation Agreement during any of the previous three (3) fiscal years,
provided that the Fund has reached a sufficient asset size to permit such
reimbursement to be made without causing the total annual expense ratio of the
Fund to exceed the percentage limits stated above. Consequently, no
reimbursement by the Fund will be made unless (i) the Fund's total annual
expense ratio is less than the percentage stated above; and (ii) the payment of
such reimbursement has been approved by the Trust's Board of Trustees on a
quarterly basis.
BROKERAGE PRACTICES
In selecting brokers and dealers to execute portfolio transactions, the Manager
may consider research and brokerage services furnished to the Manager. Subject
to seeking the most favorable net price and execution available, the Manager may
also consider sales of shares of the Fund as a factor in the selection of
brokers and dealers.
THE DISTRIBUTOR
Mercer Allied Company, L.P. ("Distributor"), an affiliate of the Manager, serves
as the distributor of the Fund's shares. The Distributor may sell Fund shares
to or through qualified securities dealers or others. The Distributor receives
no compensation from the Fund with respect to the sales of shares.
DISTRIBUTION OF THE FUND
The Fund is available only to people who own variable life insurance contracts
or variable annuity certificates and contracts issued by a life insurance
company. The Trust has applied for exemptive relief from the SEC to permit
Trust shares to be offered and sold to variable annuity and variable life
separate accounts of various insurance companies, which may not be affiliated
with one another, as well as to qualified plans.
The Fund does not currently foresee any disadvantage to Contract owners arising
from offering the Fund's shares to separate accounts funding variable annuity
contracts and separate accounts funding variable life insurance contracts or to
separate accounts of insurance companies that are unaffiliated with one another
or qualified plans. However, it is theoretically possible that the interests of
owners of various variable annuity contracts and variable life contracts
participating in the Fund through separate accounts funding those contracts or
the interests of qualified plan participants might at some time be in conflict.
In the case of a material irreconcilable conflict, one or more separate accounts
or qualified plans might withdraw their investments in the Fund, which might
force the Fund to sell portfolio securities at disadvantageous prices.
OTHER IMPORTANT INVESTMENT INFORMATION
--------------------------------------
PURCHASE AND REDEMPTION PRICE
The price at which a purchase or redemption is effected is based on the next
calculation of net asset value after an order for purchase or redemption is
received by the Fund.
Net asset value per share is calculated for purchases and redemption of shares
of the Fund by dividing the value of the Fund's total assets, less liabilities
(including Fund expenses, which are accrued daily), by the total number of
outstanding shares of the Fund. The net asset value per share of the Fund is
determined each business day at 4:00 p.m. Eastern time. Net asset value per
share is not calculated on days on which the New York Stock Exchange ("NYSE") is
closed for trading.
Because the Fund may invest a portion of its assets in foreign securities, the
Fund may experience changes in its net asset value on days when insurance
company separate accounts that invest in the Fund do not purchase or redeem
shares of the Fund because foreign securities (other than ADRs) are valued by
the Fund at the close of business in the applicable foreign country for those
securities.
All redemption requests will be processed and payment with respect thereto
normally will be made within seven days after receipt by the Fund. The Fund may
suspend redemption, if permitted by the 1940 Act, for any period during which
NYSE is closed or during which trading is restricted by the SEC or the SEC
declares that an emergency exists. Redemption may also be suspended during
other periods permitted by the SEC for the protection of the Fund's
shareholders. If the Fund's Board of Trustees determines that it would be
detrimental to the best interest of the Fund's remaining shareholders to make
payment of redemption proceeds in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution-in-kind of readily marketable securities.
HOW ASSETS ARE VALUED
The assets of the Fund are generally valued as follows:
O Stocks and debt securities which mature in more than 60 days are valued
on the basis of market quotations.
O Foreign securities not traded directly, including depositary receipts,
in the United States are valued at representative quoted prices in the
currency in the country of origin. Foreign currency is converted into
United States dollar equivalents at current exchange rates. Because
foreign markets may be open at different times than the NYSE, the value
of the Fund's shares may change on days when shareholders are not able
to buy or sell them. If events materially affecting the values of the
Fund's foreign investments occur between the close of foreign markets
and the close of regular trading on the NYSE, these investments may be
valued at their fair value.
O Short-term debt securities in the Fund that mature in 60 days or less
are valued at amortized cost, which approximates market value.
O Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the Valuation Committee of the Board of Trustees of the Fund
using its best judgment.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Fund is a regulated investment company ("RIC") for federal income tax
purposes. RICs are usually not taxed at the entity (Fund) level. They pass
through their income and gains to their shareholders by paying dividends. The
Fund will be treated as a RIC if it meets specified federal income tax rules,
including types of investments, limits on investments, calculation of income,
and dividend payment requirements. Although the Trust intends that it and the
Fund will be operated to have no federal tax liability, if they have any federal
tax liability, that could hurt the investment performance of the Fund in
question. Also, because the Fund may invest in foreign securities or hold
foreign currencies, it could be subject to foreign taxes which could reduce the
investment performance of the Fund. In addition, the Fund will diversify its
investments so that on the last day of each quarter of a calendar year, no more
than 55% of the value of its total assets is represented by any one investment,
no more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by any
four investments. For this purpose, securities of a single issuer are treated
as one investment and each U.S. Government agency or instrumentality is treated
as a separate issuer. Any security issued, guaranteed, or insured (to the
extent so guaranteed or insured) by the U.S. Government or an agency or
instrumentality of the U.S. Government is treated as a security issued by the
U.S. Government or its agency or instrumentality, whichever is applicable.
It is important for the Fund to maintain its RIC status because the insurance
company separate accounts investing in the Fund will then be permitted to use a
favorable federal income tax diversification testing rule in determining whether
the Contracts indirectly funded by the Fund meet tax qualification rules for
variable insurance contracts. If the Fund fails to meet the 55%/70%/80%/90%
diversification requirements set forth above, owners of non-pension plan
Contracts funded through the Fund could be taxed immediately on the accumulated
investment earnings under their Contracts and could lose any benefit of tax
deferral. The Manager, therefore, carefully monitors compliance with all of the
diversification requirements.
FINANCIAL HIGHLIGHTS
Financial highlights for the Fund are not provided because the Fund did not
commence operations until November 30, 2000.
ADDITIONAL INFORMATION
AYCO LARGE CAP GROWTH FUND I
Additional information about the Fund is available in the Fund's Statement of
Additional Information. An Annual or Semi-annual Report will be available once
the Fund has completed its first annual or semi-annual period. The Fund's
Annual Report will include a discussion of market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. These reports (when available) and the Statement of Additional
Information are available free of charge upon request by contacting us:
BY TELEPHONE: 1-800-235-3412
BY MAIL: AYCO LARGE CAP GROWTH FUND I
c/o The Ayco Company, L.P.
One Wall Street
Albany, New York 12205
Information about the Fund can also be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Inquiries on the operations of the public
reference room may be made by calling the SEC at 1-202-942-8090. Reports and
other information about the Fund are available on the SEC's Internet site at
http://www.sec.gov and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
Investment Company Act file number 811-10115
STATEMENT OF ADDITIONAL INFORMATION
AYCO LARGE CAP GROWTH FUND I
NOVEMBER 30, 2000
A series of the
AYCO SERIES TRUST
One Wall Street, Post Office Box 15073
Albany, New York 12212-5073
Telephone: 1-800-235-3412
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus for the Ayco Series Trust ("Trust") dated
November 30, 2000, which may be obtained without charge by writing to the Trust
at the address listed above or by calling the telephone number listed above.
Unless otherwise defined herein, capitalized terms have the meanings given to
them in the Prospectus.
The information in this Statement of Additional Information is not complete. It
may also be changed. The Fund's securities may not be sold until the Trust's
registration statement filed with the Securities and Exchange Commission is
effective.
TABLE OF CONTENTS
Page
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THE TRUST
INVESTMENT LIMITATIONS
DESCRIPTION OF PERMITTED INVESTMENTS
THE INVESTMENT MANAGER
THE ADMINISTRATOR
THE TRANSFER AGENT
PORTFOLIO TRANSACTIONS
THE DISTRIBUTOR
THE CUSTODIAN
THE INDEPENDENT AUDITORS
CALCULATION OF TOTAL RETURN
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF NET ASSET VALUE
TAXES
THE TRUST
Ayco Series Trust ("Trust") is a Delaware business trust organized on August 30,
2000. It is registered under the Investment Company Act of 1940 Act, as amended
("1940 Act"), as an open-end diversified management investment company, commonly
known as a "mutual fund."
The Trust currently consists of one series, the Ayco Large Cap Growth Fund I.
In the future, the Trust may establish additional series and classes of shares.
LEGAL CONSIDERATIONS
Under Delaware law, annual election of Trustees is not required, and, in the
normal course, the Trust does not expect to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholder meetings may be called for any purpose deemed
necessary or desirable upon the written request of the Shareholders holding at
least ten percent (10%) of the outstanding shares of the Trust entitled to vote.
Shareholders of record of not less than two-thirds of the outstanding shares of
the Trust may remove a Trustee by a vote cast in person or by proxy at a meeting
called for that purpose.
Except as set forth above, the Trustees will continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees can,
if they choose to do so, elect all the Trustees of the Trust, in which event the
holders of the remaining shares will be unable to elect any person as a Trustee.
The shares of the Fund, when issued, will be fully paid and non-assessable and
will have no preference, preemptive, conversion, exchange, or similar rights.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The Fund has adopted certain investment restrictions that are fundamental and
may not be changed without approval by a majority vote of the Fund's
shareholders. Such majority is defined in the 1940 Act as the lesser of (i) 67%
or more of the voting securities of the Fund present in person or by proxy at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present or represented by proxy; or (ii) more than 50% of the outstanding
voting securities of the Fund.
1. BORROWING. The Fund may (i) borrow for non-leveraging, temporary or
---------
emergency purposes and (ii) engage in reverse repurchase agreements, make
other investments or engage in other transactions, that may involve a
borrowing, in a manner consistent with the Fund's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33-
1/3% of the value of the Fund's respective total assets (including the
amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this
amount will be reduced in accordance with applicable law. The Fund may
borrow from banks or other persons to the extent permitted by applicable
law.
2. SENIOR SECURITIES. The Fund may not issue senior securities, except as
-----------------
permitted under the 1940 Act.
3. UNDERWRITING. The Fund may not underwrite securities issued by other
------------
persons, except to the extent that the Fund may be deemed to be an
underwriter, within the meaning of the Securities Act of 1933, as amended
("1933 Act") in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment objective,
policies and program.
4. PURCHASES OF COMMODITIES. The Fund may not purchase or sell physical
------------------------
commodities, except that it may (i) enter into futures contracts and options
thereon in accordance with applicable law and (ii) purchase or sell physical
commodities if acquired as a result of ownership of securities or other
instruments. The Fund will not consider stock index futures contracts,
currency contracts, hybrid investments, swaps or other similar instruments
to be commodities.
5. LOANS. The Fund may not lend any security or make any loan if, as a result,
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more than 33-1/3% of its total assets would be lent to other parties. This
limitation does not apply to purchases of publicly distributed or privately
placed debt securities or money market instruments or to entering into
repurchase agreements by the Fund.
6. CONCENTRATION. The Fund may not purchase the securities of any issuer if,
-------------
as a result, more than 25% of the Fund's total assets would be invested in
the securities of issuers, the principal business activities of which are in
the same industry, provided that this limitation does not apply to
investment in obligations issued or guaranteed by the United States
Government, state or local governments, or their agencies or
instrumentalities. Industries are determined by reference to the
classifications set forth in the Fund's Annual Report.
7. REAL ESTATE. The Fund may not purchase or sell real estate, except that the
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Fund may purchase (i) securities of issuers that invest or deal in real
estate, (ii) securities that are directly or indirectly secured by real
estate or interests in real estate, and (iii) securities that represent
interests in real estate, and the Fund may acquire and dispose of real
estate or interests in real estate acquired through the exercise of its
rights as a holder of debt obligations secured by real estate or interests
therein. In addition, the Fund may make direct investments in mortgages.
8. DIVERSIFICATION. The Fund may not, with respect to 75% of its total assets,
---------------
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or securities of other investment companies) if, as a
result, (i) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (ii) the Fund would hold more than 10% of the
voting securities of any one issuer.
NON-FUNDAMENTAL POLICIES
The following are the Fund's non-fundamental operating policies, which may be
changed by the Board of Trustees of the Fund without shareholder approval.
The Fund may not:
1. SHORT SALES. Effect short sales of securities or properties, unless (at all
-----------
times when a short position is open) the Portfolio owns an equal amount of
such securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the
same issue as, and at least equal in amount to, the securities sold short.
Permissible futures contracts, options or currency transactions will not be
deemed to constitute selling securities short.
2. MARGIN. Purchase securities on margin, except that the Fund may: (i) make
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use of any short-term credit necessary for the clearance of purchases and
sales of portfolio securities and (ii) make initial or variation margin
deposits in connection with futures contracts, options, currencies, or other
permissible investments.
3. ILLIQUID SECURITIES OR RESTRICTED SECURITIES. Purchase: (a) illiquid
--------------------------------------------
securities (i.e., securities that cannot be disposed of for their
approximate value in seven days or less), (b) securities restricted as to
resale (excluding securities determined by the Board of Trustees to be
readily marketable), and (c) repurchase agreements maturing in more than
seven days if, as a result, more than 15% of the Fund's net assets would be
invested in such securities.
4. OTHER INVESTMENT COMPANIES. Purchase securities of other investment
--------------------------
companies except in compliance with the 1940 Act.
5. FUTURES TRANSACTIONS. Engage in futures or options on futures transactions
--------------------
which are impermissible pursuant to Rule 4.5 under the Commodity Exchange
Act.
6. OPTIONS, ETC. Invest in puts, calls, straddles, spreads, swaps or any
------------
combination thereof, except to the extent permitted by the Fund's Prospectus
and Statement of Additional Information, as amended from time to time.
7. OIL, GAS OR OTHER MINERAL EXPLORATION OR DEVELOPMENT PROGRAMS. Purchase
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participations or other direct interests in or enter into leases with
respect to, oil, gas, or other mineral exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities or
hold mineral leases acquired as a result of its ownership of securities.
Except for the fundamental investment limitations listed above, all other
investment policies, limitations, and restrictions described in the Prospectus
and this Statement of Additional Information, including the Fund's investment
objective, are not fundamental and may be changed solely with the approval of
the Fund's Board of Trustees. Unless noted otherwise, if a percentage
restriction is adhered to at the time of investment, a later increase or
decrease in percentage resulting from a change in the Fund's assets (i.e., due
to cash inflows or redemptions) or in market value of the investment or the
Fund's assets will not constitute a violation of that restriction.
DESCRIPTION OF PERMITTED INVESTMENTS
The primary investment strategies and risks of the Fund are described in the
Prospectus. In addition to those strategies, the Fund may engage in other types
of investment strategies as further described in the descriptions below. The
Fund may invest in or utilize any of these investment strategies and instruments
or engage in any of these practices except where otherwise prohibited by law.
If the Fund anticipates committing 5% or more of their net assets to a
particular type of investment strategy or instrument, this fact is specifically
noted in the descriptions below of such investment strategy or instrument.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
including both convertible debt and convertible preferred stock. Such securities
may be converted into shares of the underlying common stock at either a stated
price or stated rate, which enable an investor to benefit from increases in the
market price of the underlying common stock. Convertible securities provide
higher yields than the underlying common stocks, but generally offer lower
yields than nonconvertible securities of similar quality. The value of
convertible securities fluctuates in relation to changes in interest rates and,
in addition, fluctuates in relation to the underlying common stock. Subsequent
to purchase by the Fund, convertible securities may cease to be rated or a
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities, although the Manager will
consider such event in its determination of whether the Fund should continue to
hold the securities.
DEPOSITARY RECEIPTS. The Fund may invest in depositary receipts. Depositary
receipts exist for many foreign securities and are securities representing
ownership interests in securities of foreign companies (an "underlying issuer")
and are deposited with a securities depositary. Depositary receipts are not
necessarily denominated in the same currency as the underlying securities.
Depositary receipts include American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") and other types of depositary receipts (which,
together with ADRs and GDRs, are hereinafter collectively referred to as
"Depositary Receipts"). ADRs are dollar-denominated Depositary Receipts
typically issued by a United States financial institution which evidence
ownership interests in a security or pool of securities issued by a foreign
issuer. ADRs are listed and traded in the United States. GDRs and other types
of Depositary Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by United States financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a United States corporation. Generally, Depositary Receipts
in registered form are designed for use in the United States securities market
and Depositary Receipts in bearer form are designed for use in securities
markets outside the United States. Although there may be more reliable
information available regarding issuers of certain ADRs that are issued under
so-called "sponsored" programs and ADRs do not involve foreign currency risks,
ADRs and other Depositary Receipts are subject to the risks of other investments
in foreign securities, as described directly below.
Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing the
unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of the Fund's investment policies, the Fund's investment in Depositary
Receipts will be deemed to be investments in the underlying securities except as
noted.
FOREIGN SECURITIES. The Fund may also invest in other types of foreign
securities or engage in certain types of transactions related to foreign
securities, such as Depositary Receipts.
Foreign investments involve certain risks that are not present in domestic
securities. For example, foreign securities may be subject to currency risks or
to foreign government taxes which reduce their attractiveness. There may be
less information publicly available about a foreign issuer than about a United
States issuer, and a foreign issuer is not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. Other risks of investing in such securities
include political or economic instability in the country involved, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. The prices of such securities may be more
volatile than those of domestic securities. With respect to certain foreign
countries, there is a possibility of expropriation of assets or nationalization,
imposition of withholding taxes on dividend or interest payments, difficulty in
obtaining and enforcing judgments against foreign entities or diplomatic
developments which could affect investment in these countries. Losses and other
expenses may be incurred in converting between various currencies in connection
with purchases and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as, and may be
more volatile than, those in the United States. While growing in volume, they
usually have substantially less volume than United States markets and the Fund's
investment securities may be less liquid and subject to more rapid and erratic
price movements than securities of comparable United States companies. Equity
securities may trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. There is generally
less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the United States. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets. Such differences may include delays beyond periods
customary in the United States and practices, such as delivery of securities
prior to receipt of payment, which increase the likelihood of a "failed
settlement," which can result in losses to the Fund.
The value of foreign investments and the investment income derived from them may
also be affected unfavorably by changes in currency exchange control
regulations. Although the Fund will invest only in securities denominated in
foreign currencies that are fully exchangeable into United States dollars
without legal restriction at the time of investment, there can be no assurance
that currency controls will not be imposed subsequently. In addition, the value
of foreign fixed income investments may fluctuate in response to changes in
United States and foreign interest rates.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher than for securities traded in the United States.
Moreover, investments in foreign government debt securities, particularly those
of emerging market country governments, involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
high rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, balance of payments and trade difficulties and extreme
poverty and unemployment.
Fluctuations in exchange rates may also affect the earning power and asset value
of the foreign entity issuing a security, even one denominated in United States
dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows may
be imposed.
In less liquid and well developed stock markets, volatility may be heightened by
actions of a few major investors. For example, substantial increases or
decreases in cash flows of mutual funds investing in these markets could
significantly affect stock prices and, therefore, share prices. Additionally,
investments in emerging market countries are subject to more specific risks, as
discussed below:
Many emerging market countries may be subject to a greater degree of social,
political and economic instability than is the case in the United States and
European countries. Such instability may result from (i) authoritarian
governments or military involvement in political and economic decision-making;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection.
The economies of emerging market countries are heavily dependent on
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.
The securities markets in emerging market countries are substantially smaller,
less liquid and more volatile than are the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by the Fund. Similarly, volume and liquidity
in the bond markets in emerging market countries are less than those in the
United States and, at times, price volatility can be greater than in the United
States. A limited number of issuers in emerging market countries may represent
a disproportionately large percentage of market capitalization and trading
value. The limited liquidity of securities markets in emerging market countries
may also affect the Fund's ability to acquire or dispose of securities at the
price and time it wishes to do so. In addition, the emerging market countries
are susceptible to being influenced by large investors trading significant
blocks of securities.
Many stock markets are undergoing a period of growth and change which may result
in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.
With respect to investments in the currencies of emerging market countries,
changes in the value of those currencies against the United States dollar will
result in corresponding changes in the United States dollar value of the Fund's
assets denominated in those currencies.
FORWARD COMMITMENTS, WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Forward
commitments, when-issued and delayed delivery transactions arise when securities
are purchased by the Fund with payment and delivery taking place in the future
in order to secure what is considered to be an advantageous price or yield to
the Fund at the time of entering into the transaction. However, the price of or
yield on a comparable security available when delivery takes place may vary from
the price of or yield on the security at the time that the forward commitment or
when-issued or delayed delivery transaction was entered into. Agreements for
such purchases might be entered into, for example, when the Fund anticipates a
decline in interest rates and is able to obtain a more advantageous price or
yield by committing currently to purchase securities to be issued later. When
the Fund purchases securities on a forward commitment, when-issued or delayed
delivery basis it does not pay for the securities until they are received, and
the Fund is required to create a segregated account with the Trust's custodian
and to maintain in that account cash or other liquid securities in an amount
equal to or greater than, on a daily basis, the amount of the Fund's forward
commitments, when-issued or delayed delivery commitments.
The Fund may make contracts to purchase forward commitments if it holds, and
maintains until the settlement date in a segregated account, cash or liquid
securities in an amount sufficient to meet the purchase price, or if it enters
into offsetting contracts for the forward sale of other securities it owns.
Forward commitments may be considered securities in themselves and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price.
The Fund will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Fund may sell
these securities before the settlement date if it is deemed advisable as a
matter of investment strategy. Forward commitments and when-issued and delayed
delivery transactions are generally expected to settle within three months from
the date the transactions are entered into, although the Fund may close out its
position prior to the settlement date by entering into a matching sales
transaction.
Although the Fund does not intend to make such purchases for speculative
purposes and the Fund intends to adhere to the policies of the SEC, purchases of
securities on such a basis may involve more risk than other types of purchases.
For example, by committing to purchase securities in the future, the Fund
subjects itself to a risk of loss on such commitments as well as on its
portfolio securities. Also, the Fund may have to sell assets which have been set
aside in order to meet redemptions. In addition, if the Fund determines it is
advisable as a matter of investment strategy to sell the forward commitment or
when-issued or delayed delivery securities before delivery, it may incur a gain
or loss because of market fluctuations since the time the commitment to purchase
such securities was made. Any such gain or loss would be treated as a capital
gain or loss and would be treated for tax purposes as such. When the time comes
to pay for the securities to be purchased under a forward commitment or on a
when-issued or delayed delivery basis, the Fund will meet its obligations from
the then available cash flow or the sale of securities, or, although it would
not normally expect to do so, from the sale of the forward commitment or when-
issued or delayed delivery securities themselves (which may have a value greater
or less than the Fund's payment obligation).
INVESTMENT COMPANY SECURITIES. Investment company securities are securities of
other open-end or closed-end investment companies. Except for so-called fund-
of-funds, the 1940 Act generally prohibits the Fund from acquiring more than 3%
of the outstanding voting shares of an investment company and limits such
investments to no more than 5% of the Fund's total assets in any investment
company and no more than 10% in any combination of unaffiliated investment
companies. The 1940 Act further prohibits the Fund from acquiring in the
aggregate more than 10% of the outstanding voting shares of any registered
closed-end investment company.
INVESTMENT GRADE DEBT SECURITIES. The Fund may invest in or hold investment
grade debt securities. Investment grade debt securities are securities rated
Baa or higher by Moody's Investors Service Inc. ("Moody's") or BBB or higher by
Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc.
("Standard & Poor's") or comparable quality unrated securities. Those
investment grade debt securities rated Baa or BBB, while normally exhibiting
adequate protection parameters, have speculative characteristics, and,
consequently, changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity of such issuers to make principal and
interest payments than is the case for higher grade fixed income securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
qualified banks, broker-dealers or other financial institutions as a means of
earning a fixed rate of return on its cash reserves for periods as short as
overnight. A repurchase agreement is a contract pursuant to which the Fund,
against receipt of securities of at least equal value including accrued
interest, agrees to advance a specified sum to the financial institution which
agrees to reacquire the securities at a mutually agreed upon time (usually one
day) and price. Each repurchase agreement entered into by the Fund will provide
that the value of the collateral underlying the repurchase agreement will always
be at least equal to the repurchase price, including any accrued interest. The
Fund's right to liquidate such securities in the event of a default by the
seller could involve certain costs, losses or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Fund could suffer a loss.
Under a repurchase agreement, underlying debt instruments are acquired for a
relatively short period (usually not more than one week and never more than a
year) subject to an obligation of the seller to repurchase and the Fund to
resell the instrument at a fixed price and time, thereby determining the yield
during the Fund's holding period. This results in a fixed rate of return
insulated from market fluctuation during that holding period.
Repurchase agreements may have the characteristics of loans by the Fund. During
the term of the repurchase agreement, the Fund retains the security subject to
the repurchase agreement as collateral securing the seller's repurchase
obligation, continually monitors on a daily basis the market value of the
security subject to the agreement and requires the seller to deposit with the
Fund collateral equal to any amount by which the market value of the security
subject to the repurchase agreements falls below the resale amount provided
under the repurchase agreement. The Fund will enter into repurchase agreements
(with respect to United States Government obligations, certificates of deposit,
or bankers' acceptances) with registered broker-dealers, United States
Government securities dealers or domestic banks whose creditworthiness is
determined to be satisfactory by the Manager, pursuant to guidelines adopted by
the Board of Trustees. Generally, the Fund does not invest in repurchase
agreements maturing in more than seven days. The staff of the SEC currently
takes the position that repurchase agreements maturing in more than seven days
are illiquid securities.
If a seller under a repurchase agreement were to default on the agreement and be
unable to repurchase the security subject to the repurchase agreement, the Fund
would look to the collateral underlying the seller's repurchase agreement,
including the security subject to the repurchase agreement, for satisfaction of
the seller's obligation to the Fund. In the event a repurchase agreement is
considered a loan and the seller defaults, the Fund might incur a loss if the
value of the collateral declines and may incur disposition costs in liquidating
the collateral. In addition, if bankruptcy proceedings are commenced with
respect to the seller, realization of the collateral may be delayed or limited
and a loss may be incurred.
SECURITIES LOANS. All securities loans will be made pursuant to agreements
requiring the loans to be continuously secured by collateral in cash or high
grade debt obligations at least equal at all times to the market value of the
loaned securities. The borrower pays to the Fund an amount equal to any
dividends or interest received on loaned securities. The Fund retains all or a
portion of the interest received on investment of cash collateral or receives a
fee from the borrower. Lending portfolio securities involves risks of delay in
recovery of the loaned securities or in some cases loss of rights in the
collateral should the borrower fail financially.
Securities loans are made to broker-dealers or institutional investors or other
persons, pursuant to agreements requiring that the loans be continuously secured
by collateral at least equal at all times to the value of the loaned securities
marked to market on a daily basis. The collateral received will consist of
cash, United States Government securities, letters of credit or such other
collateral as may be permitted under the Fund's investment program. While the
securities are being loaned, the Fund will continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice or, in connection with securities trading on foreign markets,
within such longer period for purchases and sales of such securities in such
foreign markets. The Fund will generally not have the right to vote securities
while they are being loaned, but the Manager will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed by the Manager to be of good standing and will not be made unless,
in the judgment of the Manager, the consideration to be earned from such loans
would justify the risk.
SMALL COMPANY SECURITIES. The Fund may invest in the securities of smaller
capitalization companies. Investing in securities of small companies may
involve greater risks because these securities may have limited marketability
and, thus, may be more volatile. Because smaller companies normally have fewer
shares outstanding than larger companies, it may be more difficult for the Fund
to buy or sell significant amounts of shares without an unfavorable impact on
prevailing prices. In addition, small companies often have limited product
lines, markets or financial resources and are typically subject to greater
changes in earnings and business prospects than are larger, more established
companies. There is typically less publicly available information concerning
smaller companies than for larger, more established ones and smaller companies
may be dependent for management on one or a few key persons. Therefore, an
investment in these Portfolios may involve a greater degree of risk than an
investment in other Portfolios that seek capital appreciation by investing in
better known, larger companies.
UNITED STATES GOVERNMENT SECURITIES. The Fund may invest in debt obligations of
varying maturities issued or guaranteed by the United States Government, its
agencies or instrumentalities ("United States Government securities"). Direct
obligations of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. United States
Government securities also include securities issued or guaranteed by government
agencies that are supported by the full faith and credit of the United States
(e.g., securities issued by the Federal Housing Administration, Export-Import
Bank of the United States, Small Business Administration, and Government
National Mortgage Association); securities issued or guaranteed by government
agencies that are supported by the ability to borrow from the United States
Treasury (e.g., securities issued by the Federal National Mortgage Association);
and securities issued or guaranteed by government agencies that are supported
only by the credit of the particular agency (e.g., Interamerican Development
Bank, the International Bank for Reconstruction and Development, and the
Tennessee Valley Authority).
WARRANTS. The Fund may purchase warrants and similar rights. Warrants are
securities that give the holder the right, but not the obligation to purchase
equity issues of the company issuing the warrants, or a related company, at a
fixed price either on a date certain or during a set period. At the time of
issue, the cost of a warrant is substantially less than the cost of the
underlying security itself, and price movements in the underlying security are
generally magnified in the price movements of the warrant. This effect enables
the investor to gain exposure to the underlying security with a relatively low
capital investment but increases an investor's risk in the event of a decline in
the value of the underlying security and can result in a complete loss of the
amount invested in the warrant. In addition, the price of a warrant tends to be
more volatile than, and may not correlate exactly to, the price of the
underlying security. If the market price of the underlying security is below
the exercise price of the warrant on its expiration date, the warrant will
generally expire without value.
The equity security underlying a warrant is authorized at the time the warrant
is issued or is issued together with the warrant. Investing in warrants can
provide a greater potential for profit or loss than an equivalent investment in
the underlying security, and, thus, can be a speculative investment. The value
of a warrant may decline because of a decline in the value of the underlying
security, the passage of time, changes in interest rates or in the dividend or
other policies of the company whose equity underlies the warrant or a change in
the perception as to the future price of the underlying security, or any
combination thereof. Warrants generally pay no dividends and confer no voting or
other rights other than the right to purchase the underlying security.
THE INVESTMENT MANAGER
The Ayco Company, L.P. ("Ayco"), One Wall Street, Albany, New York 12212, serves
as the investment manager to the Fund ("Manager") through its Ayco Asset
Management division pursuant to an investment management agreement ("Management
Agreement"). The General Partner of Ayco is Hambre, Inc., a corporation wholly-
owned by John Breyo, the Trust's Chief Executive Officer and a Trustee of the
Trust. Subject to the Management Agreement and the authority of the Board of
Trustees, the Manager, among other things: (i) makes investment decisions on
behalf of the Fund; (ii) places all orders for the purchase and sale of
investments for the Fund with brokers or dealers that it selects; and (iii)
performs certain related administrative functions in connection therewith.
Under the Management Agreement, the Manager is required to furnish to the Trust,
at its own expense and without remuneration from or other cost to the Trust, the
following:
O Office space, all necessary office facilities and equipment;
O Necessary executive and other personnel, including personnel for the
performance of clerical and other office functions, other than those
functions related to and to be performed under the Trust's agreement or
agreements for administration, custodial, accounting, bookkeeping, transfer
and dividend disbursing agency or similar services by the entity selected to
perform such services; and
O Information and services, other than services of outside counsel or
independent accountants, required in connection with the preparation of all
registration statements, prospectuses and statements of additional
information, any supplements thereto, annual, semi-annual, and periodic
reports to Trust Shareholders, regulatory authorities, or others, and all
notices and proxy solicitation materials, furnished to Shareholders or
regulatory authorities, and all tax returns. The Management Agreement also
requires the Manager (or its affiliates) to pay all salaries, expenses, and
fees of the Trustees and officers of the Trust who are affiliated with the
Manager or its affiliates.
The Management Agreement will be in effect for an initial term ending November
30, 2002. For its services, the Manager is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of 0.80% of the Fund's
average daily net assets. The Manager and the Trust have also entered into an
expense limitation agreement with respect to the Fund ("Expense Limitation
Agreement"), pursuant to which the Manager has agreed to waive or limit its fees
and to assume other expenses so that the total annual operating expenses (with
certain exceptions described in the Prospectus) of the Fund are limited to the
extent described in the "Management of the Fund--The Investment Manager--Expense
Limitation Agreement" section of the Prospectus.
Under the Management Agreement, the Manager is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of such Management Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Manager in
the performance of its duties or from its reckless disregard of its duties and
obligations under the Management Agreement.
After its initial two year term, the continuance of the Management Agreement
must be specifically approved at least annually (i) by the Board or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund and (ii) by the affirmative vote of a majority of the Trustees who are
not parties to the Management Agreement or "interested persons" (as defined in
the 1940 Act) of any such party by votes cast in person at a meeting called for
such purpose. The Management Agreement may be terminated (i) at any time,
without the payment of any penalty, by the Trust upon the vote of a majority of
the Trustees or by vote of the majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund upon sixty (60) days' written notice to the
Manager or (ii) by the Manager at any time without penalty upon sixty (60) days'
written notice to the Trust. The Management Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
THE ADMINISTRATOR
The Trust has entered into Fund Accounting and Fund Administration Servicing
Agreements with Firstar Mutual Fund Services, LLC ("FMFS" or "Administrator"), a
Wisconsin limited liability company, whose address is 615 East Michigan Street,
Milwaukee, Wisconsin 53202.
The Administrator will perform the following services, among others, for the
Trust: (1) act as liaison among all Fund service providers; (2) supply corporate
secretarial services, office facilities, non-investment-related statistical and
research data as needed, and assistance in preparing for, attending and
administering shareholder meetings; (3) provide services to the Board such as
establishing meeting agendas for all regular and special Board meetings,
preparing Board reports based on financial and administrative data, evaluating
independent accountants, monitoring fidelity bond and errors and
omissions/director and officer liability coverage, preparing minutes of Board
and shareholder meetings of the Board and shareholders meetings, recommending
dividend declarations and capital gain distributions to the Board, preparing and
distributing to appropriate parties notices announcing declarations of dividends
and other distributions; (4) provide assistance and support in connection with
audits; (5) prepare and update documents, such as the Trust's Declaration of
Trust and by-laws, provide assistance in connection with routine regulatory
examinations or investigations, coordinate all communications and data
collection with regard to any regulatory examinations and yearly audits by
independent accountants, maintain a general corporate and compliance calendar
for the Trust, prepare, propose and monitor the Trust budget, and develop or
assist in developing guidelines and procedures to improve overall compliance by
the Trust and its various agents; (6) monitor of compliance of the Trust with
regulatory requirements; (7) prepare and, after approval by the Trust, arrange
for the filing of such registration statements and other documents with the
Securities and Exchange Commission and other federal and state regulatory
authorities as may be required by applicable law; (8) provide assistance in
financial reporting matters; and (9) take such other action with respect to the
Fund as may be necessary in the opinion of the Administrator to perform its
duties under the agreement. The Administrator will also provide certain
accounting and pricing services for the Fund.
Compensation of the Administrator, based upon the average daily net assets of
the Fund, for administration services, is at the following annual rates:
0.0875% of the Fund's first $200 million of average daily net assets, 0.075% on
the next $500 million, and 0.05% on average daily net assets over $700 million.
Compensation of the Administrator, based upon the average daily net assets of
the Fund, for accounting services, is at the following annual rates: $30,000
for the Fund's first $100 million of average daily net assets, 0.0156% on the
next $200 million, and 0.01% on average daily net assets over $300 million. The
Administrator also charges the Trust for certain costs involved with the daily
valuation of investment securities and is reimbursed for out-of-pocket expenses.
THE TRANSFER AGENT
The Trust has entered into a Dividend Disbursing and Transfer Agent Agreement
with FMFS, 615 East Michigan Street, Milwaukee, WI 53202, to serve as transfer,
dividend paying, and shareholder servicing agent for the Fund.
PORTFOLIO TRANSACTIONS
The Manager is authorized to select brokers and dealers to effect securities
transactions for the Fund. The Manager will seek to obtain the most favorable
net results by taking into account various factors, including price, commission,
if any, size of the transactions and difficulty of executions, the firm's
general execution and operational facilities, and the firm's risk in positioning
the securities involved. While the Manager generally seeks reasonably
competitive commissions, the Trust will not necessarily be paying the lowest
spread or commission available. The Manager seeks to select brokers or dealers
that offer the Fund best price and execution or other services which are of
benefit to the Fund. Certain brokers or dealers assist their clients in the
purchase of shares and charge a fee for this service in addition to the Fund's
public offering price. In the case of securities traded in the over-the-counter
market, the Manager expects normally to seek to select primary market makers.
The Manager may, consistent with the interests of the Fund, select brokers on
the basis of the research services they provide to the Manager. Such services
may include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Information so received
by the Manager will be in addition to and not in lieu of the services required
to be performed by the Manager under the Management Agreement. If, in the
judgment of the Manager, the Fund or other accounts managed by the Manager will
be benefited by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining Fund strategy; providing
computer software used in security analyses; and providing Fund performance
evaluation and technical market analyses. The expenses of the Manager will not
necessarily be reduced as a result of the receipt of such information, and such
services may not be used exclusively, or at all, with respect to the Fund or
account generating the brokerage, and there can be no guarantee that the Manager
will find all of such services of value in advising the Fund.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking best execution and such other policies as
the Board of Trustees may determine, the Manager may consider sales of the
Fund's shares as a factor in the selection of broker-dealers to execute Fund
transactions for the Fund.
The Board of Trustees has adopted a Code of Ethics governing personal trading by
persons who manage, or who have access to trading activity by the Fund. The
Code of Ethics allows trades to be made in securities that may be held by the
Fund, however, it prohibits a person from taking advantage of Fund trades or
from acting on inside information.
THE DISTRIBUTOR
Mercer Allied Company, L.P. ("Distributor"), One Wall Street, Post Office Box
15073, Albany, New York 12212-5073, acts as an underwriter and distributor of
the Trust to assist in sales of Fund shares pursuant to a Distribution Agreement
("Distribution Agreement") approved by the Board of Trustees of the Trust. The
General Partner of the Distributor is Breham, Inc., a corporation wholly-owned
by John Breyo, the Trust's Chief Executive Officer and a Trustee of the Trust,
and therefore, may be deemed to be affiliated with Ayco. The Distributor
receives from the Fund no compensation for its distribution for its services to
the Fund.
The Distributor is a broker-dealer registered with the Securities and Exchange
Commission and is a member in good standing of the National Association of
Securities Dealers, Inc.
After its initial two year term, the Distribution Agreement will remain in
effect from year to year provided the Distribution Agreement's continuance is
approved annually by (i) a majority of the Trustees who are not parties to such
agreement or "interested persons" (as defined in the 1940 Act) of the Trust or
the Fund ("Independent Trustees") and (ii) either by vote of a majority of the
Trustees or a majority of the outstanding voting securities (as defined in the
1940 Act) of the Trust. The Distribution Agreement may be terminated by either
party upon 60 days' prior written notice to the other party.
Distributors or their affiliates will pay for printing and distributing
prospectuses or reports prepared for their use in connection with the offering
of Fund shares to prospective Contract owners and participants in tax-qualified
retirement plans and preparing, printing and mailing any other literature or
advertising in connection with the offering of Fund shares to prospective
Contract owners and participants in tax-qualified retirement plans.
THE CUSTODIAN
Firstar Bank, N.A. ("Custodian"), 425 Walnut Street, Cincinnati, Ohio 45202,
serves as custodian for each Fund's assets. The Custodian acts as the
depository for the Fund, safekeeps its portfolio securities, collects all income
and other payments with respect to portfolio securities, disburses monies at the
Fund's request, and maintains records in connection with its duties as
Custodian. The Custodian has also entered into sub-custodian agreements with a
number of foreign banks and clearing agencies, pursuant to which portfolio
securities purchased outside the United States are maintained in the custody of
these entities. For its services as Custodian, the Custodian is entitled to
receive from the Fund an annual fee based on the average net assets of the Fund
held by the Custodian.
THE LEGAL COUNSEL
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006 serves as legal counsel
to the Trust and its Board.
THE INDEPENDENT AUDITORS
The firm of PricewaterhouseCoopers LLP, 100 E. Wisconsin Avenue, Milwaukee,
Wisconsin 53202, serves as independent auditors for the Fund.
PricewaterhouseCoopers LLP is responsible for auditing the annual financial
statements of the Fund.
CODE OF ETHICS
The Trust, Ayco and the Distributor have adopted codes of ethics, as required by
applicable law, which is designed to prevent affiliated persons of the Trust,
Ayco and the Distributor from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Fund
(which may also be held by persons subject to a code of ethics). There can be
no assurance that the codes of ethics will be effective in preventing such
activities.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the State of Delaware. The name, address, and age of each Trustee is
given below as well as their position(s) (if any) with the Trust and/or Fund and
principal occupations for the last five years. Each may have held other
positions with the named companies during that period. Those Trustees who are
"interested persons" (as defined in the 1940 Act) by virtue of their affiliation
with either the Trust or the Manager are indicated by an asterisk (*).
As of November 30, 2000, the Trustees and officers of the Trust, as a group,
owned Contracts entitling them to provide voting instructions in the aggregate
with respect to less than one percent of the Trust's shares of beneficial
interest.
<TABLE>
Position(s) Principal Occupation(s)
Name, Address, and Age With Fund/Trust During Past 5 Years
---------------------- --------------- --------------------
<S> <C> <C>
John Breyo (55)* Chief Executive Chief Executive Officer, Chairman of the Board of Directors and President,
One Wall Street Officer and Trustee Ayco (Sept. 1997 - current); Office of the President (1986- Sept. 1997)
Albany, New York 12212
Herbert A. Chesbrough (54) Trustee President of Saratoga Performing Arts Center, Inc.
Saratoga Performing Arts Center (Saratoga Springs, New York)
Saratoga Springs, New York 12866
Anthony J. DePaula (56) Trustee Owner and President of DePaula Chevrolet, Inc.
781 Central Avenue
Albany, New York 12206
</TABLE>
COMPENSATION. Trustees of the Trust who are "interested persons" of the Trust
or the Manager will receive no salary or fees from the Trust. Other Trustees
receive $10,000 each year for services to the Trust as a retainer, and receive
$1,000 for each meeting attended in person or telephonically. Each current
Trustee of the Trust who is not an "interested person" of the Trust is expected
to receive the following compensation during the fiscal year ending December 31,
2000:
Total
Aggregate Compensation
Name of Person, Compensation from the Trust
Position from the Trust Paid to Trustees
--------------- -------------- ----------------
Herbert A. Chesbrough $2,000 $2,000
Anthony J. DePaula $2,000 $2,000
OFFICERS OF THE TRUST
No officer of the Trust receives any compensation paid by the Trust. Each
officer of the Trust is an employee of Ayco. The Trust's principal officers
are:
<TABLE>
Principal Occupation(s)
Name, Age, and Position with Trust During Past 5 Years
---------------------------------- -------------------
<S> <C>
John Breyo (54) Chief Executive Officer, Chairman of the Board of Directors and President, Ayco
Chief Executive Officer and Trustee (Sept. 1997 - current); Office of the President (1986- Sept. 1997)
John J. Collins, III (46) Chief Financial Officer, Ayco (1992 - current)
Chief Financial Officer and Controller
Peter H. Heerwagen (55) Chief Investment Officer, Ayco Asset Management (1986 - current)
Vice President and Secretary
Margaret M. Keyes (37) Deputy General Counsel, Ayco (1996-present); Associate General Counsel,
Assistant Secretary Ayco (1989-1996)
Bryce T. Kucks (29) Compliance Administrator, FMFS, (1996-current); Research Analyst,
Assistant Secretary Bloomberg Financial Markets
(1993-1996)
</TABLE>
CONTROL PERSON AND PRINCIPAL HOLDERS OF VOTING SECURITIES. The Trust
continuously offers its shares to separate accounts of insurance companies in
connection with Contracts and to tax-qualified retirement plans. The Trust's
shares currently are sold to insurance company separate accounts in connection
with Contracts issued by those insurance companies. As of the date of this
Statement of Additional Information, the Trust's sole shareholder is Ayco.
Therefore, Ayco may be deemed to control the Trust.
Because of current federal securities law requirements, the Trust expects that
its shareholders will offer owners of the Contracts ("Contract owners") the
opportunity to instruct shareholders as to how shares allocable to Contracts
will be voted with respect to certain matters, such as approval of investment
advisory agreements. To the Trust's knowledge, as of the date of this Statement
of Additional Information ("SAI"), no person owns Contracts entitling such
person to give voting instructions regarding more than 5% of the outstanding
shares of the Fund.
CALCULATION OF TOTAL RETURN
The Fund may advertise its total return. The total return of the Fund refers to
the average compounded rate of return of a hypothetical investment for
designated time periods (including, but not limited to, the period from which
the Fund commenced operations through the specified date), assuming that the
entire investment is redeemed at the end of each such period. In particular,
total return will be calculated according to the following formula: P (1 + T)n
= ERV, where P = a hypothetical initial payment of $1,000; T = average annual
total return; n = number of years; and ERV = ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the designated time period
as of the end of such period.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations.
The Fund's performance may be compared in advertisements, sales literature,
shareholder reports, and other communications to the performance of other mutual
funds having similar objectives or to standardized indices or other measures of
investment performance. In particular, the Fund may compare its performance to
the S&P 500 Composite Stock Price Index. Comparative performance may also be
expressed by reference to a ranking prepared by a mutual fund monitoring service
or by one or more newspapers, newsletters, or financial periodicals. The Fund
may also occasionally cite statistics to reflect its volatility and risk. The
Fund may also compare its performance to other published reports of the
performance of unmanaged portfolios of companies. The performance of such
unmanaged portfolios may not reflect the effects of dividends or dividend
reinvestment. Of course, there can be no assurance that any fund will
experience the same results. Performance comparisons may be useful to investors
who wish to compare a Fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of total return as described
above.
As indicated, from time to time, the Fund may advertise its performance compared
to similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends,
and it takes into account any change in net asset value over a specific
period of time.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Investors may use such indices in addition to the Fund's Prospectus to obtain a
more complete view of the Fund's performance before investing. Of course, when
comparing a fund's performance to any index, factors such as composition of the
index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing funds or total returns, using
reporting services, investors should take into consideration any relevant
differences in funds such as permitted portfolio compositions and methods used
to value portfolio securities and compute offering price. Advertisements and
other sales literature for the Fund may quote total returns that are calculated
on non-standardized base periods. The total returns represent the historic
change in the value of an investment in the Fund based on monthly reinvestment
of dividends over a specified period of time.
From time to time, the Fund may include in advertisements and other
communications information, charts, and illustrations relating to inflation and
the effects of inflation on the dollar, including the purchasing power of the
dollar at various rates of inflation. The Fund may also disclose, from time to
time, information about its portfolio allocation and holdings at a particular
date (including ratings of securities assigned by independent rating services
such as S&P and Moody's). The Fund may also depict the historical performance
of the securities in which the Fund may invest over periods reflecting a variety
of market or economic conditions either alone or in comparison with alternative
investments, performance indices of those investments, or economic indicators.
The Fund may also include in advertisements and in materials furnished to
present and prospective shareholders statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
to meet specific financial goals, such as saving for retirement, children's
education, or other future needs.
PURCHASE AND REDEMPTION OF SHARES
The purchase or redemption price of shares is based on the next calculation of
net asset value after an order is accepted in good form. The Fund's net asset
value per share is calculated by dividing the value of the Fund's total assets,
less liabilities (including Fund expenses, which are accrued daily), by the
total number of outstanding shares of the Fund. The net asset value per share
of the Fund is normally determined at the time regular trading closes on the New
York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time, Monday through
Friday), except on business holidays when the New York Stock Exchange is closed.
Currently, the following holidays are observed by the NYSE: New Year's Day,
Martin Luther King's Birthday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Shares of the
Fund are offered on a continuous basis.
DETERMINATION OF NET ASSET VALUE
In valuing the Fund's total assets:
O Equity securities are valued at the last sale price on the principal
exchange or market where they are traded.
O Securities which have not traded on the date of valuation or securities
for which sales prices are not generally reported, are valued at the
mean between the current bid and asked prices.
O Bond and other fixed income securities (other than short-term
obligations) are valued on the basis of valuations furnished by a
pricing service, use of which has been approved by the Board of
Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques
that take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect
more accurately the fair value of such securities.
O Short-term obligations (maturing in 60 days or less) are valued at
amortized cost, which constitutes fair value as determined by the Board
of Trustees.
O Securities for which there are no such valuations are valued at fair
value as determined in good faith by or at the direction of the Board
of Trustees.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates at the time of valuation.
Trading in securities on most non-U.S. exchanges and over-the-counter markets is
normally completed before the close of regular trading on the NYSE and may also
take place on days on which the NYSE is closed. If events materially affecting
the value of non-U.S. securities occur between the time when the exchange on
which they are traded closes and the time when the Fund's net asset value is
calculated, such securities will be valued at fair value in accordance with
procedures established by and under the general supervision of the Board of
Trustees.
Interest income on long-term obligations held for the Fund is determined on the
basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued less amortization of any premium.
REDEMPTION IN-KIND
If the Trustees determine that it would be detrimental to the best interest of
the Fund's remaining shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution-in-kind of readily
marketable securities. As a result, the Fund has elected to be governed by Rule
18f-1 under the 1940 Act pursuant to which it is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder. The securities so
distributed would be valued at the same amount as that assigned to them in
calculating the net asset value of the shares being sold. If a holder of shares
received a distribution in kind, that holder could incur brokerage or other
charges in converting the securities to cash.
TAXES
The Fund is treated for federal income tax purposes as a separate taxpayer. The
Trust intends that the Fund shall qualify each year and elect to be treated as a
regulated investment company ("RIC") under Subchapter M of the Code. Such
qualification does not involve supervision of management or investment practices
or policies by any governmental agency or bureau.
As a RIC, the Fund will not be subject to federal income or excise tax on any of
its net investment income or net realized capital gains which are timely
distributed to shareholders under the Code. A number of technical rules are
prescribed for computing net investment income and net capital gains. For
example, dividends are generally treated as received on the ex-dividend date.
Also, certain foreign currency losses and capital losses arising after October
31 of a given year may be treated as if they arise on the first day of the next
taxable year.
The Fund, by investing in foreign securities or currencies, may be subject to
foreign taxes which could reduce the investment performance of the Fund.
To qualify for treatment as a regulated investment company, the Fund must, among
other things, derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies, or other
income derived with respect to its business of investing. For purposes of this
test, gross income is determined without regard to losses from the sale or other
dispositions of stock or securities.
In addition, the Secretary of the Treasury has regulatory authority to exclude
from qualifying income described above foreign currency gains which are not
"directly related" to a regulated investment company's "principal business of
investing" in stock, securities or related options or futures. The Secretary of
the Treasury has not to date exercised this authority.
Generally, in order to avoid a 4% nondeductible excise tax, the Fund must
distribute to its shareholders during the calendar year the following amounts:
O 98% of the Fund's ordinary income for the calendar year;
O 98% of the Fund's capital gain net income (all capital gains, both
long-term and short-term, minus all such capital losses), all computed
as if the Fund were on a taxable year ending October 31 of the year in
question and beginning November 1 of the previous year; and
O any undistributed ordinary income or capital gain net income for the
prior year.
The excise tax generally is inapplicable to any regulated investment company
whose sole shareholders are either tax-exempt pension trusts or separate
accounts of life insurance companies funding variable contracts. Although the
Fund believes that it is not subject to the excise tax, the Fund intends to make
the distributions required to avoid the imposition of such a tax.
The Fund also intends to comply with the separate diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder on certain
insurance company separate accounts. These requirements, which are in addition
to the diversification requirements imposed on the Fund by the 1940 Act and
Subchapter M of the Code, place certain limitations on assets of each insurance
company separate account used to fund variable contracts. Because Section
817(h) and those regulations treat the assets of the Fund as assets of the
related separate account, these regulations are imposed on the assets of the
Fund. Specifically, the regulations provide that, after a one year start-up
period or except as permitted by the "safe harbor" described below, as of the
end of each calendar quarter or within 30 days thereafter no more than 55% of
the total assets of the Fund may be represented by any one investment, nor more
than 70% by any two investments, no more than 80% by any three investments and
no more than 90% by any four investments. For this purpose, all securities of
the same issuer are considered a single investment, and each U.S. Government
agency and instrumentality is considered a separate issuer. Section 817(h)
provides, as a safe harbor, that a separate account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets is
attributable to cash and cash items (including receivables), U.S. Government
securities and securities of other regulated investment companies. Failure by
the Fund to both qualify as a regulated investment company and to satisfy the
Section 817(h) requirements would generally cause the variable contracts to lose
their favorable tax status and require a contract holder to include in ordinary
income any income accrued under the contracts for the current and all prior
taxable years. Under certain circumstances described in the applicable Treasury
regulations, inadvertent failure to satisfy the applicable diversification
requirements may be corrected, but such a correction would require a payment to
the Internal Revenue Service based on the tax contract holders would have
incurred if they were treated as receiving the income on the contract for the
period during which the diversification requirements were not satisfied. Any
such failure may also result in adverse tax consequences for the insurance
company issuing the contracts. Failure by the Fund to qualify as a regulated
investment company would also subject the Fund to federal and state income
taxation on all of its taxable income and gain, whether or not distributed to
shareholders.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account, income and gains produced by those securities would be
included currently in the contract owner's gross income. It is not know what
standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that a Fund will be able to operate as currently described, or that the Trust
will not have to change a Fund's investment objective or investment policies. A
Fund's investment objective and the investment policies of a Fund may be
modified as necessary to prevent any such prospective rules and regulations from
causing Variable Contract Owners to be considered the owners of the Shares of
the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the fiscal year ended December 31, 2000,
including the financial highlights appearing in the Fund's Annual Report to
Shareholders, will be available once the Fund has completed its first annual
period.
AYCO SERIES TRUST-
AYCO LARGE CAP GROWTH FUND I
FINANCIAL STATEMENTS
NOVEMBER 9, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Trustees of
Ayco Series Trust
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Ayco Large Cap Growth Fund I (comprising Ayco Series
Trust, hereafter referred to as the "Fund") at November 9, 2000 and the results
of its operations from the period August 30, 2000 (inception date) through
November 9, 2000, in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 13, 2000
AYCO SERIES TRUST-
AYCO LARGE CAP GROWTH FUND I
STATEMENT OF ASSETS AND LIABILITIES
AS OF NOVEMBER 9, 2000
ASSETS
CASH $100,000
Receivable from advisor 67,800
--------
167,800
LIABILITIES
Accrued organizational expenses 67,800
--------
NET ASSETS $100,000
--------
--------
Shares outstanding (unlimited shares authorized) 10,000
Net asset value and offering price per share $10.00
--------
--------
The accompanying notes are an integral part of these financial statements.
AYCO SERIES TRUST-
AYCO LARGE CAP GROWTH FUND I
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 30, 2000 (INCEPTION DATE) THROUGH NOVEMBER 9, 2000
EXPENSES:
Organizational expenses $ 67,800
Expenses reimbursed by advisor $ 67,800
--------
Net income/loss $ --
--------
--------
The accompanying notes are an integral part of these financial statements.
AYCO SERIES TRUST-
AYCO LARGE CAP GROWTH FUND I
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Ayco Series Trust (the "Trust") was organized as a Delaware business trust
on August 30, 2000 and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Trust currently consists of one
series: the Ayco Large Cap Growth Fund I (the "Fund"). In the future, the
Trust may establish additional series and classes of shares. Pursuant to
the 1940 Act, the Fund is an open-end, diversified series of the Trust. The
Fund's operations to date have been limited to the receipt of $100,000 of
seed capital from The Ayco Company, L.P. and any organizational activities.
The Fund's investment objective is long-term growth of capital. The Fund
currently offers one class of shares.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION COSTS
The Ayco Company, L.P., (the "Advisor") intends to reimburse the Fund for
expenses incurred in connection with the organization of the Fund. These
reimbursed expenses may be recovered by the Advisor in the future, subject
to certain limitations (see Note 3).
FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders in a manner
which results in no tax cost to the Fund.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements.
Actual results could differ from those estimates.
3. INVESTMENT ADVISOR
The Trust and the Advisor intend to enter into an investment advisory
agreement on behalf of the Fund, whereby the Fund pays the Advisor a monthly
fee equal to an annual rate of 0.80% of the Fund's average daily net assets.
The Advisor has agreed, through December 31, 2001, to waive or limit its
fees and to assume other expenses so that the total annual operating
expenses of the Fund (other than interest, taxes, brokerage commissions,
other expenditures which are capitalized in accordance with generally
accepted accounting principles, distribution related expenses (if any), and
other extraordinary expenses not incurred in the ordinary course of the
Fund's business) are limited to an annual rate of 1.00% of the average daily
net assets of the Fund.
The Fund may at a later date reimburse the Advisor for the fees waived or
limited and other expenses assumed and paid by the Advisor during any of the
previous three fiscal years, provided that the Fund has reached a sufficient
asset size to permit such reimbursement to be made without causing the total
annual expense ratio of the Fund to exceed the percentage limits stated
above. Consequently, no reimbursement by the Fund will be made unless (i)
the Fund's total annual expense ratio is less than the percentage stated
above; and (ii) the payment of such reimbursement has been approved by the
Trust's Board of Trustees on a quarterly basis.
4. DISTRIBUTION PLAN
Mercer Allied Company, L.P. (the "Distributor"), acts as an underwriter and
distributor of the Trust to assist in sales of Fund shares pursuant to a
distribution agreement. The general partner of the Distributor is Breham,
Inc., a corporation wholly-owned by the Trust's chief executive officer and
a Trustee of the Trust, and therefore, may be deemed to be affiliated with
the Fund. The Distributor receives no compensation from the Fund for its
distribution services.
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust.1<F11>
(b) By-Laws.1<F11>
(c) None.
(d) Investment Management Agreement between Ayco Series Trust ("Trust") and
The Ayco Company, L.P.
(e) Distribution Agreement between the Trust and Mercer Allied Company,
L.P.
(f) Not Applicable.
(g) Custody Agreement between the Trust and Firstar Bank, N.A.
(h) Other Material Contracts.
(h)(1) Fund Administration Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC.
(h)(2) Fund Accounting Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC.
(h)(3) Transfer Agent Servicing Agreement between the Trust and Firstar Mutual
Fund Services, LLC.
(h)(4) Expense Limitation Agreement between the Trust and The Ayco Company,
L.P.
(h)(5) Participation Agreement by and among the Trust, American General Life
Insurance Company, and Mercer Allied Company, L.P.
(h)(6) Administrative Services Agreement by and among the Trust, The Ayco
Company, L.P. and American General Life Insurance Company.
(i) Opinion and Consent of Dechert regarding the legality of the securities
being registered.
(j) Consent of PricewaterhouseCoopers LLP, Independent Public Accountants.
(k) None
(l) Initial Capital Agreements between the Trust and The Ayco Company, L.P.
(m) None
(n) Plan Pursuant to Rule 18f-3 under the 1940 Act.
(p)(1) Form of Joint Code of Ethics of the Trust, The Ayco Company, L.P. and
Mercer Allied Company L.P.
(q) Power of Attorney for the Trust.
---------------
1.<F11> Incorporated herein by reference to Registrant's Registration
Statement on Form N-1A filed on September 5, 2000 (File No. 333-
45794).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE TRUST
The Ayco Company, L.P. ("Ayco"), is currently the sole initial shareholder of
the Trust and controls the Trust by virtue of its ownership of 100% of the
Trust's outstanding shares. All Trust shareholders that are life insurance
companies issuing variable annuity contracts and/or variable life insurance
contracts are required to solicit instructions from their respective contract
owners as to certain matters. The Trust may in the future offer its shares to,
among others, insurance companies and qualified plans.
The General Partner of Ayco is Hambre, Inc., a corporation wholly-owned by John
Breyo, the Trust's Chief Executive Officer and a Trustee of the Trust.
ITEM 25. INDEMNIFICATION
Declaration of Trust of the Trust ("Declaration of Trust") and By-Laws.
Article VII, Section 2 of the Declaration of Trust states, in relevant
part, that a "Trustee, when acting in such capacity, shall not be personally
liable to any Person, other than the Trust or a Shareholder to the extent
provided in this Article VII, for any act, omission or obligation of the Trust,
of such Trustee or of any other Trustee. The Trustees shall not be responsible
or liable in any event for any neglect or wrongdoing of any officer, agent,
employee, Manager, or Principal Underwriter of the Trust. The Trust shall
indemnify each Person who is serving or has served at the Trust's request as a
director, officer, trustee, employee, or agent of another organization in which
the Trust has any interest as a shareholder, creditor, or otherwise to the
extent and in the manner provided in the By-Laws." Article VII, Section 4 of
the Trust's Declaration of Trust further states, in relevant part, that the
"Trustees shall be entitled and empowered to the fullest extent permitted by law
to purchase with Trust assets insurance for liability and for all expenses
reasonably incurred or paid or expected to be paid by a Trustee, officer,
employee, or agent of the Trust in connection with any claim, action, suit, or
proceeding in which he or she may become involved by virtue of his or her
capacity or former capacity as a Trustee of the Trust."
Article VI, Section 2 of the Trust's By-Laws states, in relevant part, that
"[s]ubject to the exceptions and limitations contained in Section 3 of this
Article VI, every agent shall be indemnified by the Trust to the fullest extent
permitted by law against all liabilities and against all expenses reasonably
incurred or paid by him or her in connection with any proceeding in which he or
she becomes involved as a party or otherwise by virtue of his or her being or
having been an agent." Article VI, Section 3 of the Trust's By-Laws further
states, in relevant part, that "[n]o indemnification shall be provided hereunder
to an agent: (a) who shall have been adjudicated, by the court or other body
before which the proceeding was brought, to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office
(collectively, "disabling conduct"); or (b) with respect to any proceeding
disposed of (whether by settlement, pursuant to a consent decree or otherwise)
without an adjudication by the court or other body before which the proceeding
was brought that such agent was liable to the Trust or its Shareholders by
reason of disabling conduct, unless there has been a determination that such
agent did not engage in disabling conduct: (i) by the court or other body before
which the proceeding was brought; (ii) by at least a majority of those Trustees
who are neither Interested Persons of the Trust nor are parties to the
proceeding based upon a review of readily available facts (as opposed to a full
trial-type inquiry); or (iii) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a full trial-type
inquiry); provided, however, that indemnification shall be provided hereunder to
an agent with respect to any proceeding in the event of (1) a final decision on
the merits by the court or other body before which the proceeding was brought
that the agent was not liable by reason of disabling conduct, or (2) the
dismissal of the proceeding by the court or other body before which it was
brought for insufficiency of evidence of any disabling conduct with which such
agent has been charged." Article VI, Section 4 of the Trust's By-Laws also
states that the "rights of indemnification herein provided (i) may be insured
against by policies maintained by the Trust on behalf of any agent, (ii) shall
be severable, (iii) shall not be exclusive of or affect any other rights to
which any agent may now or hereafter be entitled and (iv) shall inure to the
benefit of the agent's heirs, executors and administrators."
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER
The descriptions of The Ayco Company, L.P., under the caption of "Management of
the Fund" in the Prospectus and under the caption "The Investment Manager" in
the Statement of Additional Information constituting Parts A and B,
respectively, of this Registration Statement are incorporated by reference
herein. The information as to the directors and officers of The Ayco Company,
L.P., is set forth in The Ayco Company, L.P.'s Form ADV filed with the
Securities and Exchange Commission on December 28, 1994 (File No. 801-4823) and
amended through the date hereof, is incorporated by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Mercer Allied Company, L.P., is the principal underwriter of the
Trust's shares.
(b) Set forth below is certain information regarding the directors and
officers of Breham, Inc., the General Partner of Mercer Allied
Company, L.P., the principal underwriter of the Trust's shares.
BREHAM, INC.
<TABLE>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH BREHAM, INC. POSITIONS AND OFFICES WITH THE TRUST
---------------- ---------------------- ------------------------------------
<S> <C> <C>
DIRECTORS
*<F3> John Breyo President Chief Executive Officer
*<F3> John J. Collins, III Treasurer Chief Financial Officer and Controller
*<F3> Peter Martin Vice President and Secretary
OFFICERS
*<F3> John Breyo President Chief Executive Officer
*<F3> John J. Collins, III Treasurer Chief Financial Officer and Controller
*<F3> Peter Martin Vice President and Secretary N/A
*<F3> Kim Oster Vice President N/A
*<F3> Margaret M. Keyes Vice President Assistant Secretary
*<F3> James Roberts Vice President N/A
</TABLE>
*<F3> Address is c/o The Ayco Company, L.P., One Wall Street, Albany, New
York 12205.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the Rules promulgated thereunder, are
maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8);
(12); and 31a-1(d), the required books and records are maintained at the
offices of the Trust's Custodian:
Firstar Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
(b) With respect to Rules 31a-1(a); 31a-1(b)(1), (4); (2)(C) and (D); (4); (5);
(6); (8); (9); (10); (11) and 31a-1(f), the required books and records are
currently maintained at the offices of the Trust's Administrator:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202.
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the
required books and records are maintained at the principal offices of the
Trust's Manager:
The Ayco Company, L.P.
One Wall Street
Albany, New York, 12205
ITEM 29. MANAGEMENT SERVICES
None.
ITEM 30. UNDERTAKINGS
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, ("1933
Act") and the Investment Company Act of 1940, as amended, the Trust has duly
caused this Pre-Effective Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Albany, and the State of New York on the 28th day of November, 2000.
AYCO SERIES TRUST
By: /s/ John Breyo
----------------------------------
John Breyo
Chief Executive Officer and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John Breyo Chief Executive Officer November 28, 2000
------------------------ and Trustee
John Breyo
/s/ Herbert A. Chesbrough Trustee November 28, 2000
------------------------
Herbert A. Chesbrough
/s/ Anthony J. DePaula Trustee November 28, 2000
------------------------
Anthony J. DePaula
/s/ John J. Collins, III Chief Financial Officer November 28, 2000
------------------------ and Controller
John J. Collins, III
EXHIBIT LIST
Exhibit DESCRIPTION
-----------
(d) Investment Management Agreement between Ayco Series Trust
("Trust") and The Ayco Company, L.P.
(e) Distribution Agreement between the Trust and Mercer Allied
Company, L.P.
(g) Custody Agreement between the Trust and Firstar Bank, N.A.
(h)(1) Fund Administration Servicing Agreement between the Trust and
Firstar Mutual Fund Services, LLC.
(h)(2) Fund Accounting Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC.
(h)(3) Transfer Agent Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC.
(h)(4) Expense Limitation Agreement between the Trust and The Ayco
Company, L.P.
(h)(5) Participation Agreement by and among the Trust, American General
Life Insurance Company, and Mercer Allied Company, L.P.
(h)(6) Administrative Services Agreement by and among the Trust, The
Ayco Company, L.P. and American General Life Insurance Company.
(i) Opinion and Consent of Dechert regarding the legality of the
securities being registered.
(j) Consent of PricewaterhouseCoopers LLP, Independent Public
Accountants.
(l) Initial Capital Agreements between the Trust and The Ayco
Company, L.P.
(n) Plan Pursuant to Rule 18f-3 under the 1940 Act.
(p)(1) Form of Joint Code of Ethics of the Trust, The Ayco Company, L.P.
and Mercer Allied Company. L.P..
(q) Power of Attorney for the Trust.
